As a small business owner, you’re always looking for ways to improve your cash flow. One option you may have considered is account receivable factoring. But what exactly is this type of financing, and how does it work? This blog post will answer those questions and more, so you can decide if accounts receivable factoring is right for your business.
Can companies sell accounts receivable?
The short answer is YES. Companies usually sell their receivables to free up cash flow to cover costs or make investments that could increase sales/profits.
What is it called when a company buys your accounts receivable?
The answer is Factoring! Factoring is a great way to get cash upfront for your accounts receivable.
What is factoring for companies?
Accounts Receivable Factoring is sometimes called “Invoice Factoring.” It refers to the process of when a business sells unpaid invoices to an accounts receivable factoring company or a “Factor” for a discount rate. It is now the job of the factoring company to collect the payment from your customer. Once the factoring company collects from the client, they pay the small business owner the remainder of the invoice amount, minus factoring fees.
What is accounts receivable financing?
Factoring is a financial transaction where the business sells its invoices to another party called a factor. Factors purchase these assets from companies looking for liquidity or short-term financing solutions.
What happens if a company sells its accounts receivables to a factor?
Companies can sell their accounts receivable to a third party for less than they are worth to increase cash flow. The factoring company will review the invoices (and the invoiced customers) to gauge their repayment risk. Once approved, the receivables are sold, and the factoring company will fund your business within days.
Why would a company sell receivables to another company?
Businesses can use factoring to make their company’s finances more stable. If you have invoices coming in with a certain amount due, factored accounts allow for immediate access to that money so you can use it to invest in other projects and put your business funds to good use.
What is factoring accounts receivable, for example?
So when you sell your accounts receivables to a third-party factoring company, the discounted purchase price gets calculated using what’s known as a factor rate. Here’s an example.
Let’s say you sold $20,000 of outstanding receivables. And let’s say the factor rate is 3%. The purchase price of your receivables would then be $20,000 less minus the factor rate. So you’d receive 97% of $20,000. This means the factor would buy your receivables for $19,400.
However, this does not mean you would receive $19,400 immediately. Instead, you’re more likely to receive an upfront advance. For our example, let’s use 85% of the purchase price. So you would receive $16,490 now.
And then, once the factor collects on your receivables, you’d receive the remaining 15% (that works out to $2,910) of the purchase price of your receivables.
What do factoring companies do?
Factoring companies buy receivables from merchants for a discount to make a profit on the difference between what they lend and what they collect over time.
What percentage do factoring companies take?
Factoring companies are usually happy to take a 1% or 2% fee per month but could be up to 5% p/mo, depending on the company. Some factored businesses offer lower fees for larger invoices, and others charge additional if you exceed your limit (which most people do).
What should I ask a factoring company?
You should ask them about their factor advance rate, if they work with a business like yours, how fast you can secure funding from them and if they offer recourse and non-recourse financing.
Is a factoring company considered a bank?
Traditional financing firms and banking institutions may seem alike, but they have distinct differences. Factoring companies work with business owners who need money quickly or on an ongoing basis, while banks provide longer-term loans for various purposes such as purchasing a property.
What are the advantages and disadvantages of factoring?
Factoring is a fantastic method of getting quick cash for your company. The advantages are that it shortens the time it takes to receive funds, you’re not required to put up any collateral, and factored invoices can be paid immediately or at the maturity date.
What is the difference between factoring and accounts receivable financing?
With Invoice Factoring, you are selling your outstanding invoices in exchange for capital, whereas with Invoice Financing, you’re using those invoices as collateral for a loan.
What is factoring accounts receivable with recourse?
Recourse factoring can be an excellent lower-risk option for the factoring company and often more affordable than non-recourse for the business selling the invoices. Business owners are responsible for their invoice with recourse factoring if the customer fails to pay. If the customer doesn’t pay back your invoice to the factoring company with recourse factoring, you’ll need to cover it and buy out their debt from the factor.
Who bears the risk of collection in a non-recourse factoring of accounts receivable?
Factoring your invoices with a non-recourse factoring company could be the best way to ensure you get paid for services without risking bad debt. Because they take on more responsibility than regular invoice factoring companies, non-recourse factors have the leverage to charge additional fees for that increased risk. On top of this, non-recourse factors may avoid accepting invoices from customers with bad credit and payment histories.
What is the difference between factoring with recourse and without recourse?
Factoring with recourse means that the vendor, not the factor, will bear any financial loss in case the retailer fails to pay an invoice. Non-recourse factoring allows for less liability for the merchant selling the receivables.
What do factoring companies require?
Industry your business caters to, the volume of invoices being factored or financed, net terms of any invoice, credit, and payment history of your customers.
Are factoring companies regulated?
There’s no regulation of factoring companies in the U.S. Still. There are several associations that each member must join to establish themselves as legitimate and fair traders with their peers across similar industries.